2 Answers

An S Corp has both advantages and disadvantages compared to being a sole proprietor. From a self employment tax standpoint, by designating a 'reasonable' amount of her income as wages, which is subject to self employment taxes and the rest as a distribution, which is not subject to those same self employment taxes, so she would end up paying less than if she was a sole proprietor. As you know, there are some downsides to the S Corp. The downsides are that there generally higher costs for legal and tax preparation. Only you can tell if the payroll savings outweigh the additional costs. | 08.12.15 @ 04:29

Phillip Christenson, CFA in Plymouth, MN — What Rob is referring to is counting only part of your wife's S-Corp income as a salary which is a legitimate way to reduce payroll taxes but the rest of the earnings would be distributions. Either way you are paying income tax on all the earnings because an S-Corp is a flow through entity. You do have the potential to save some payroll taxes as long as your wife draws a "reasonable salary." What's reasonable? It's a grey area, but what would a psychologist in your area with similar years of experience be paid as a salary? That's a good starting point. Feel free to reach out if you need some more help. Again more details about your situation will help us provide better answers. | 08.12.15 @ 13:31

Rob Jupille, Financial Adviser in Santa Monica, CA — HI Jose. Think of payroll taxes in terms of things like the amount deducted from your paycheck for Medicare, Social Security, etc. That amount is based on 'wages' or 'salary' you earn so if you're getting paid a salary that portion is subject to those taxes. Sole proprietors have to pay those payroll taxes on their ENTIRE income (up to a limit) while the owner of an S Corp has the flexibility to decide what a 'reasonable' amount of wages are and pay payroll taxes only on that portion. I would recommend you sit down with your CPA to help determine the best choice of entity (as well as most prudent tax strategy) for your particular situation. Phillip is right, we can only really speak in broad terms with the information available. | 08.12.15 @ 22:11

Hi Jose, your wife can only be one or the other a sole proprietor or an S-Corp. In general a sole proprietorship is easier to setup and manage compared to an S-Corp. If you go this route just make sure you have some additional liability insurance as the sole proprietorship business entity provides little liability protection. As a sole proprietor your wife's income will be subject to self-employment taxes (also called payroll taxes) via her 1040, Schedule , and Schedule SE tax forms. If you are set up as an S-Corp you still have to pay payroll taxes but the S-Corp pays half through your payroll service. But since your wife is the owner of the company she is in effect still paying the tax. Please elaborate on your situation and I can try to help.-Phillip | 08.12.15 @ 13:25